After studying this chapter , you will be able to :

1.Explain the meaning and the changing role of accounting.

2.List users of accounting information and their information needs.

3.Defined accounting theory and explain its need.

Chapter 1: Introduction to Accounting Theory

After studying this chapter , you will be able to :

4.Classify accounting theories and spell out the main levels of theory.

5.Describe the foundations of accounting theory .

6.Discuss accounting in economic ,social, legal, and other environments.

Chapter 1: Introduction to Accounting Theory

Chapter 1: Introduction to Accounting

Theory

No system can develop in a scientific manner unless it has a theoretical base.

Accounting is an information system that

• Identifies

• Records

• Communicates the economic events of an organization to interested users.

Accounting as an Information System

Inputs(data)

ProcessingOutputs

information

EventsRecordingClassifying

SummarizingAnalyzing

Reports:-Balance Sheet

-Income Statement-Cash Flow Statement

-Etc…

User of Accounting Information

Direct interest Users:

- Owners , creditors , suppliers , management ,etc…..

Indirect interest Users:

-Financial analysts , labors union , trade association ,regularity authorities ,etc….

Users’ Information Needs

Broadly, information on the following aspects is needed by different categories of users :

To be able to decide when to buy , hold , or sell an equity investment.

To assess the ownership . To assess the ability of the firm to pay and

provide other benefits to its employees.

Users’ Information Needs

To determine taxation policies . To determine distribution profits and

dividends. To regulate the activates of the enterprise.

“..a set of interrelated constructs (concepts),definitions, and propositions that present a systematic view of phenomena by specifying relations among variables with the purpose of explaining and predicting the phenomena.”

Definition of Accounting Theory

Provide a better understanding of existing practices to investors ,managers , and other users.

Provide a conceptual framework for evaluating existing accounting practices ,and

Guide the development of new practices and procedures.

Accounting Theory aims to:

Research methodology for the formulation of an accounting theory

1. Inductive Method:

Involve reasoning from the particular to the general. (Example: if every hare which we have observed eat grass ,by induction ,we may induce that all hares eat grass).

Research methodology for the formulation of an accounting theory

2. Deductive Method:

Involve reasoning from the general to the particular . (Example: if all hares eat grass ,we may by deduction ,infer that some hares eat grass) .

Observation1

Hypothesis2

Experiments3

Conclusion4

The Sequence of Research methodology

Classification of Accounting theory

- There are several ways of classifying accounting theory , as follows :

1.According to time(1915-1945-1975).2.Inductive & Deductive.3.Normative & positive.

- There are three main levels of theory. The levels are as follows :

1.Structural or syntactical theories.2.Interpretational or semantical theories.3.Behavioural or pragmatic theories.

This theory attempts to explain current accounting practices and predict how accountants would react to certain situations.

- Or how accountants would report specific events .

These theories relate to the structure of data collection process and financial reporting.

Theories explaining accounting practices are desirable to obtain greater insight into current practices ,permit a more precise evaluation of traditional theory ,and permit an evaluation of existing practices that do not correspond to traditional theory.

Structural (syntactical ) Theories

These theories concentrate on the relation between a phenomenon (object or event) and the term or symbol representing it .

The accounting theory aims at giving meaningful interpretations to these concept. It also evaluates alternatives accounting procedures in terms of these interpretations.

Interpretational (semantical) theories

Thus , the role of theories that emphasize interpretation is to find ways to improve the ability of accounting information to be interpreted in terms of human observation and experience.

Interpretational (semantical) theories

Theses theories emphasize the behavioral or decision-oriented effects of accounting reports and statement .

- As we know the object of accounting aims to provide information to interested users.

- So these theories attempt to seek answers to the basic question :

Behavioral (pragmatic) theories

1. Who are the users of published financial statements.

2. What is the type of the specific information wanted by the several user group.

3. Will general purpose financial statements meet the needs of all types of users.

Behavioral (pragmatic) theories

The theoretical foundation of accounting theory can be discussed from two sides:

1.Nature of accounting theory.

2.Roots of accounting theory.

Foundation of Accounting Theories

- No generally accepted theory of accounting, but there are a number of accounting theories has made by (FASB) to formulate a comprehensive theory of accounting .This is due to the difference in perception of “users” and “environment”.

1.Nature of accounting theory

- Roots of accounting theory can be found in:

1. Decision theory .

2. Measurement theory .

3. Information theory.

2. Roots of accounting theory